DoubleLine Launches Unconstrained-Style Bond Fund

By Michael Aneiro

If you can’t beat ‘em, join ‘em. DoubleLine just filed paperwork with the SEC today to launch the DoubleLine Flexible Income Fund, an unconstrained-style bond fund. From the prospectus:

The Fund seeks current income and capital appreciation by active asset allocation among market sectors in the fixed income universe. These sectors may include, for example, U.S. Government securities, corporate debt securities, mortgage and asset backed securities, foreign debt securities, including emerging market debt securities, loans, and high yield debt securities. The Adviser has broad flexibility to use various investment strategies and to invest in a wide variety of fixed income instruments that the Adviser believes offer the potential for current income, capital appreciation, or both. The Fund is not constrained by management against any index.

Note those two words: “not constrained.” Why are they significant? Because they identify the fund as an unconstrained-style fund, a loosely defined bond-fund category that’s exploded in popularity lately after being marketed as a way to dodge interest-rate risk. As I wrote in my Barron’scover story in October, unconstrained funds can be all over the map in terms of what they own, but what unites the category is the ability to eschew traditional bond index benchmarks, offering managers broad investing flexibility, and their strategies have tended toward shortening duration and lowering credit quality.

This marks a big departure from what DoubleLine founder Jeffrey Gundlach - who will manage the new fund – has previously said about unconstrained funds, which is basically that he doesn’t like them. Here’s what he told me during a conversation four months ago:

“Unconstrained funds are popular because people don’t know what they are. They think what bond funds used to do isn’t going to work, so now the holy grail is to show me a bond fund that doesn’t have any interest-rate risk but somehow has return. Unconstrained funds actually have more risk than total return funds or core funds because they have more aggressive investments.”

“Measured against an index you become more of a security selector. If you’re good at that, then you can have the same broad statistical exposure to bonds, like the same duration and you can monitor the yield and so on, but you’re buying mispricings in the market, and you have a confidence about performing that way. When it comes to an unconstrained fund, thematically, if they’re approached the way they’re marketed, they’re kind of macro funds.”

Gundlach’s flagship DoubleLine Total Retun Fund (DLTNX) has grown to $32 billion since its inception less than four years ago and has consistently been a top performer in its category. The new fund’s launch comes as unconstrained funds are growing in popularity while total return-style funds have struggled to stem investor outflows after many lost money in 2013.

A DoubleLine spokesman declined to comment further, citing the quiet period while the SEC reviews the filing. Here’s more from the new fund’s prospectus:

The Adviser expects to allocate the Fund’s assets in response to changing market, economic, and political factors and events that the Fund’s portfolio manager believe may affect the values of the Fund’s investments. The allocation of the Fund’s assets to different sectors and issuers will change over time, sometimes rapidly, and the Fund may invest without limit in a single sector or a small number of sectors of the fixed income universe. The Fund may invest in securities of any credit quality.